‘Chained CPI’ Represents a Balanced Approach

A House subcommittee heard testimony last week about the possibility of relying on a more accurate measure of inflation for the tax code and cost-of-living adjustments in federal benefits, an idea that The Concord Coalition and many economists support.

Use of this measure – known as the “chained CPI” – would help gradually reduce federal deficits and represents a balanced approach to fiscal reform, with both spending reductions and increased revenues.

To President Obama’s credit, his proposed budget for Fiscal 2014 would switch to the chained CPI for Social Security and some other spending programs as well as for the tax system. The Ways and Means Subcommittee on Social Security heard testimony on the subject last Thursday.

Jeffrey Kling, associate director for economic analysis with the Congressional Budget Office (CBO), said many analysts think the government’s traditional Consumer Price Index, or CPI, overstates increases in the cost of living because it does not fully account for changes in consumer spending patterns as the result of price changes. In addition, he said, the traditional CPI has a “statistical bias” related to limited data collection.

Ed Lorenzen, executive director of The Moment of Truth Project, was emphatic in explaining the merits of the chained CPI. He said the index, created in 2002, “enjoys broad support from experts across the political and ideological spectrum who agree that it is the best available measure for overall changes in the cost of living.”

Every serious bipartisan budget plan, Lorenzen noted, has included use of the chained CPI. He said it enjoyed very strong support on the Simpson-Bowles fiscal commission.

“Addressing our fiscal challenges will require many tough choices and policies, but adopting the chained CPI represents neither,” he said. “Eliminating the unjustified increases in spending and reduced revenues from the current inaccurate measure of inflation should be a priority for any comprehensive deficit reduction plan.”

The subcommittee also received testimony from Nancy Altman, co-chair of the Strengthen Social Security Coalition; Charles P. Blahous III, a Social Security and Medicare trustee, and BLS officials.